Credit Card Chargebacks

On occasion, funds that were on their way to you from a consumer are reversed and go back to the consumer. If this happens to you, it is likely that you are seeing evidence chargeback, a mechanism that provides consumer protection under Federal Reserve Regulation Z in the Truth in Lending Act, by which U.S. credit card holders may reverse a payment. To learn more about credit card chargebacks, continue with this article.

What Happens in a Chargeback

A chargeback is initiated by a customer for one of a number of reasons by calling his or her credit card company. Let’s say, s/he ordered merchandise online that never arrived. The card issuer may begin by placing the amount in question aside (the cardholder is not responsible for it, pending an investigation), and conducts an inquiry. During this inquiry, the card issuer will attempt to reach the merchant and, usually, see what the merchant has to say and whether there is any other possible solution.

Let’s say that, in this case, not only has the customer been unsuccessful in reaching the merchant, but the card issuer is also unable to reach the merchant. In this case the situation is likely to be decided quickly in the customer’s favor. The card issuer permanently removes the dollar amount from the cardholder’s account. The cardholder receives a credit for that amount and is absolved of responsibility for the transaction.

The card issuer then debits the merchant back for the dollar amount in question. The merchant back is likely to deduct the dollar amount from the merchant’s account, and so the sale is lost. Also lost, depending on the circumstances, may be an internal costs for processing the chargeback and the merchandise in question.

Valid Reasons for Chargebacks

Although chargebacks may be undesirable, there are legitimate reasons for them. These include:

• Disputes, for reasons such as failure to process a credit, merchandise not received or defective, service not performed in the manner expected, fraudulent purchase (that is, it was not made by the customer), cancelation of order, etc.
• Errors in processing, (e.g., overcharging, duplicate)
• Issues with authorization
• Unfulfilled copy requests

Errors that lead to chargebacks may be due to the customer, the merchant, the card issuer, or the merchant bank. Because some of these reasons are out of your hands, you cannot prevent all cases of chargeback. Some of these, however, you may be able to avoid.

Ways to Avoid Chargebacks

In some cases, chargebacks can be avoided by prompt and thoughtful customer service. Customers with valid disputes are often happy with replaced merchandise or store credit, and sweetening the deal with a coupon for a future purchase or other gesture to make up for the inconvenience is usually very much appreciated. Key to this, however, is not only prompt action, but prompt communication, by phone or email. You may be sending a replacement, but unless you let the customer know, the chargeback may be initiated in the meantime.

Other tips for avoiding chargebacks include the following:

• Respond promptly and graciously to any inquiries from customers regarding problems with orders and with card issuers making contact on their customers’ behalf.
• Don’t accept expired cards.
• Obtain and check the cardholder’s signature.
• Don’t accept transactions from a cardholder who is present but without his or her card.
• Make sure the sales receipt is legible.
• If a transaction is declined, ask for another form of payment.
• Ship merchandise prior to depositing the transaction.
• Alert customers to any shipping delays or backorders and find out their wishes regarding waiting for merchandise or substitution.
• Make sure your policy for returns, refunds, and/or cancellation of services is readily available and clearly stated.

Sources

usa.visa.com

ncosc.net